Economic Perspective: The Fed’s Interest Rate Hike

MIKE WALDEN:

“Today’s program looks at the Fed’s interest rate hike. Recently the Federal Reserve boosted it’s key short-term interest rate by about one-quarter percentage point bringing it to an even two percent. While the move was widely expected it still raises questions about why the Fed did it, and the risk the higher rate poses for the economy.”

“So what’s really going on with this? Well we have to remember the Fed has two mandates: keep inflation low and keep unemployment low. Now for years after the Great Recession the Fed had been working on the second mandate, keeping unemployment low, and they did that by keeping interest rates very, very low to motivate people to borrow and spend money.”

“Now we do have low unemployment, and the problem of inflation is beginning to creep back. Inflation’s now running at near three percent a year. It had been as low as one percent a year. So the Fed has shifted focus, and they want to try to contain inflation by raising interest rates.”

“Now there are two risks with this. One, that the Fed will overdo interest rate hikes and snuff out, or severely reduce, economic growth. That could cause a recession. Or the Fed could get into an arms race where inflation keeps rising, and the Fed has to keep pushing up interest rates. Again that result could be a recession.”

“So it’s always difficult for the Federal Reserve to achieve both of these goals, low inflation and low unemployment, and the big question is, ‘Can they do it now?’”